Job Changers Face
A Property Dilemma

Question: I have lived in my home for almost a year and a half. I was let go by my company a few months a go. I am moving to another state for employment and am considering renting my current house. If I keep it as a rental property and I decide to sell it in three years, can I still use the $500,000 deduction for married couples on the sale? I assume that while renting it I will be able to deduct mortgage payments and real-estate taxes.

-- Leon, Newton, Mass.

Leon: You face a dilemma that, unfortunately, many others are facing in today's volatile economy. Namely, what should you do with your house when you're forced to move to a distant area because of a job change? Should you sell? Or should you try to hold onto your home for a time? You say you are interested in renting it out but are concerned about the tax consequences of doing this.

You should be OK tax-wise as long as you meet the "2 out of 5 years" rule. Simply stated, you must have owned and lived in the house as your principal residence for two out of the previous five years in order to claim the up to $250,000 per person exclusion (up to $500,000 for married couples). If you've lived in it already for two years, then you should be able to rent it out for three and still be within the boundaries of the rule. However, be sure not to cut things too close and miss deadline dates.

And yes, while holding it as a rental you can subtract your mortgage interest (not equity return), taxes, maintenance, some repairs and other costs and depreciation from your rental income. However, you may or may not be able to deduct any loss that occurs from your ordinary income depending on how high that income is. (Generally, you cannot deduct a loss if your income exceeds $150,000 a year, but may be able to deduct at least part of the loss up to $25,000 if your income is lower.) The rules are complicated so you need to see an accountant beforehand to see how they apply to you.

However, there's an even bigger issue here that you have not touched upon and that's how well you'll be able to handle a rental while living some distance away. My own rule is NEVER own real-estate rental property that's more than a half an hour drive away from your home. The reason is that you'll need to be close by in order to take care of the place. That includes: finding tenants, doing maintenance and repair work, fielding tenant complaints, handling clean-up after tenants move out and so on. As one who has made the mistake of owning property at a distance, my suggestion is that if you can make a profit on the property, you'd probably be better off selling now. The hopes of a bigger profit in the future might well be dashed by the hassle of dealing with rental issues from far away.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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